Fed's Waller calls for higher interest rates to curb inflation

• Fed Governor Christopher Waller believes US monetary policy is not restrictive enough.
• A 0.3% monthly inflation reading in October could require more aggressive policy action.
• The Fed Governor sees higher interest rates as necessary to bring inflation down.

Federal Reserve (Fed) Governor Christopher Waller adopts a hawkish tone on Tuesday, arguing that interest rates need to rise to put downward pressure on inflation, according to Reuters.

Key takeaways

0.3% US Oct monthly CPI would suggest inflation moving away from target, need more aggressive policy action.

I don’t think we’ll see broad-based productivity gains from AI for a while.

Real rates have to rise to maintain level of restrictiveness in monetary policy.

Policy has been not nearly as restrictive as I thought.

We need to raise rates to put downward pressure on inflation.

Asked about sharp stock price moves, says not generally important for his view on rates.

Democrat control of congress will act as a check on presidential appointments to Fed.

Market reaction

The US Dollar (USD) rebounds following Waller's hawkish comments, reversing earlier losses, with the US Dollar Index (DXY) trading around 101.70, up 0.05% on Tuesday.

Waller flags risk of larger December hike as inflation worries intensify

Fed’s Waller delivered a notably more hawkish message, with a 9/10 FXS Speechtracker score standing well above the 7.3/10 historical average, underscoring a clear shift toward tighter policy bias. The explicit openness to a half-point FED rate hike in December if October core CPI prints around 0.3% or higher, alongside support for at least a quarter-point move even on better data, signals a strong reaction function to any sign that inflation is drifting away from target. Emphasis on broad-based price pressures, still-solid growth and labor conditions, and the view that policy has not been as restrictive as previously thought reinforces upside risks for the Dollar and front-end yields.

The FXS Fed Sentiment Index rose by 3.17 points to 145.50, keeping the gauge deeply in hawkish territory and aligning with the elevated FXS Speechtracker score. This combination points to a market narrative of renewed tightening resolve, with expectations shifting toward higher and potentially faster rate increases if incoming inflation data fail to show convincing progress.